Have you ever wondered why you are not getting the return on investment you thought you could get from your business? The answer is simple: You are not properly and comprehensively calculating your true cost of operation.

Without knowing your true cost of operation in totality and as it pertains to the services you offer to consumers, you will guess at your prices rather than calculate them.

In the contracting business, as it pertains to the building trades, the first thing to know is how much one hour of labor and overhead for one technician costs you, regardless of whether you are in the new construction or service sectors of the industry. Your product is your time spent on the project at hand.

Unfortunately, many contractors don’t know how to calculate their true costs. Many others find out how much their competition charges and then charge a dollar less. 

However, since many contractors do not know their true operational costs, the number emulated by the copycat contractor is likely not the right amount for the contractor they are copying, let alone the proper amount for the emulator.

Wrong results are always arrived at when numbers are not properly calculated. In other words, you can’t hit the target when you don’t know where the target is.

Selling Tech Hours

The first thing to consider for true operational costs is how many tech hours you must sell in any fiscal period. It is imperative to understand that the number of hours you must sell is not the same as the number of hours you pay your techs.

You annually pay for 2,080 hours/tech in a 40-hour/52-week year. However, when you subtract two weeks for vacation/personal time, six holidays, and one hour/workday lost to nonrevenue-producing time, you only have a maximum of 1,708 hours to sell per tech.

If you paid an average tech $25/hour, the tech’s annual salary would be $52,000 ($25 x 2,080 hours paid). 

If you sold all your tech hours all the time (and no contractor does), $52,000 ÷ 1,708 maximum sellable hours makes your cost per sold tech hour $30.45. Sell less than 1,708 hours and the cost to your business rises. At only 1,600 tech hours sold/tech, your cost rises to $32.50.

And your labor cost doesn’t end there. You must still calculate salary-related expenses such as FICA matching funds, unemployment/disability insurance, workers’ compensation insurance, liability insurance related to payroll, health insurance and retirement pay.

Once you properly calculate (and I emphasize the word properly) those costs, you will have the true cost of the technician’s salary and related expenses.

Other Costs to Consider

Next, you must properly calculate overhead costs for vehicles and vehicular expenses, administrative costs inclusive of administrative salaries and salary-related expenses, insurances other than those previously considered, shop and office expenses including utilities, communication costs, advertising, professional services of lawyers, accountants and consultants, callbacks; customer relations, bad debt, breakage and loss, tools, licenses, continuing education, bank charges, uniforms, and a slew of unforeseen items falling under the category of Murphy’s Law. 

A U.S. service contracting business can expect one qualified service tech and one properly equipped service vehicle to probably cost the contractor somewhere between $100 and $250 per tech/truck hour for labor and overhead costs if all tech hours are sold all the time.

If only 1,600 hours/tech are sold annually, that range jumps from $106.75 to $266.86.

Next, you must try to foretell how many tech hours you will probably sell in any year. I know, you don’t have a crystal ball. However, you probably do know the number of hours you sold on average per year; it should give you a basis to formulate your prediction. 

The only way to get the results you intended is to calculate your true operational costs properly and comprehensively in totality and as it pertains to any given service. 

At the lower end of the $100 to $250 labor/overhead cost to contractor range, $100/tech hour cost multiplied by 1,708 potential revenue-producing hours would cost you $170,800/tech annually — whether you sold all your hours or not.

Using $170,800 as an example, if you wanted a 10 percent profit margin, your selling price per tech hour based on a labor/overhead cost of $100/tech hour would have to be $111.11 ($100 ÷ 90 percent), and you would bring in $189,775.88 (1,708 hours sold x $111.11).

By doing that, you would earn a profit of $18,975.88. That amount divided by the revenue of $189,775.88 would give you a nearly 10 percent profit margin (9.9991 percent).

If you use a 10 percent markup of cost method, your selling price per tech hour based on a labor/overhead cost of $100/tech hour would be $110 ($100 x 10 percent = $10), giving you a selling price per tech hour of $110. The revenue brought in would be $187,880. The profit would be only $17,080, 9.09 percent of the selling price.

However, if you only sell 1,600 hours/tech and want a 10 percent profit margin since your true annual cost is still $170,800 (based on the low end of the cost-to-contractor range), you would need to sell each of those 1,600 hours at $118.61. That would give you revenue of $189,776. Your profit would be $18,976, which is 9.999 percent.

To get the results you want, you must remember that you only have three choices regarding your selling prices: sell at your true cost, below your true cost or above your true cost at a level that can allow you to get where you want to go. After all, profitable results require proper and comprehensive calculation.